Secured vs unsecured bonds and maturity date

A bond can either be secured or unsecured. A secured bond means that there is collateral to backup the loan. This principle also applies to loans like:

  • Personal loans
  • Mortgages

Quest: Collateral

What is the collateral of the bank when they issue a mortgage?

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8.1 Maturity date of bonds

Bonds have a maturity date. You can compare this with your mortgage if you have one. After x amount of years (usually 30) your mortgage payment is completed. You no longer have to pay a mortgage and you own your house 100%. The mortgage stops to exist. The same thing applies to bonds. When a bond matures, it reaches the end of its lifetime. You stop receiving interest and get paid the par value of the bond. The par value is the amount of money the issuer (company or government) agrees to repay the investor when the bond reaches its maturity date. More on this in the next chapter.

Bond owners also have certain rights:

Feature / rights Common stock Preferred stock Bonds
Voting rights Yes No No
Dividends Variable amount Fixed amount No (interest)
Dividend payment order Last First x
Claim on leftovers after liquidation Last  Second Last First and last*
Call Option No Yes Yes
Maturity date x x Depends on the bond

* Secured bond holders are first in line, unsecured bond holders last

When you buy secured bonds, the value of the bond is backed up with collateral from the company or government. But that does not mean your bonds can’t become worthless on the market. The only guarantee you have is that your annual interest payments are made and you’ll receive the par value back at the end of the maturity (in case of a secured bond). If bond prices collapse because of a big rise in market interest, not even a secured bond will protect against that.

In the next chapter we'll take a look at how bonds operate and why market interest rate is very important. 

Key Concepts:

  • Bonds can be secured or unsecured.
  • Secured bonds are backed by collateral.
  • Unsecured bonds are back by nothing.
  • Secured bonds can still become worthless when the market collapses.
  • The maturity date is the lifespan of the bond.
  • The par value is the amount of money the issuer has to pay the buyer when the bond matures.
  • Bond holders have other rights than stockholders.

Chapters: The Ultimate Investing Guide

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